Are the days of the individually-named DB pension scheme trustee numbered?
HMRC has recently issued two briefing notes in relation to reclaiming VAT on invoices for pension scheme services. Whilst on the face of it, the note for defined contribution (DC) schemes seems to be gifting an early Christmas present, the tax-man may be playing scrooge in relation to defined benefit (DB) schemes. Certain costs of running a DB pension scheme could jump by 20% unless a solution is found.
Before now, HMRC has treated different services received by occupational schemes in different ways for the purposes of reclaiming VAT. VAT on 'administration services' (such as actuarial and administration fees) was recoverable by the sponsoring employer, whereas VAT on 'investment management services' was generally not recoverable.
Where invoices straddled both types of services, a 30/70 split could be assumed (with VAT recoverable on the 30% of the invoice assumed to relate to administration services). Transitional arrangements are expected to apply until 31 December 2015.
DC schemes: plum pudding?
The European Court of Justice, in the case of ATP PensionService, has ruled that DC pension schemes are classed as special investment funds (SIFs) for VAT purposes. Management services (including investment, administration and marketing) for SIFs should be exempt from VAT.
HMRC’s brief says that, specifically, the management of pension funds are exempt from VAT where they are solely funded, directly or indirectly, by individual members who bear investment risk spread over a range of securities. The fund must also contain the pooled contributions of several pension customers.
It would appear that the Revenue is acting Santa to sponsors and trustees of DC schemes, although the final position is not yet entirely clear. For example, HMRC has not explicitly said which services fall under the ‘administration services’ exemption. Nevertheless, sponsoring employers of DC schemes should seek specialist tax and legal advice and consider asking managers to reclaim historic VAT overpayments.
DB schemes: cold turkey?
The second new brief sets out HMRC’s revised stance on the recovery of VAT on DB pension fund costs, as a result of the decision in the Dutch case of PPG Holdings in July 2013.
Although HMRC now says that there are no grounds to differentiate between administration and investment services, recovering VAT against invoices for either is likely to prove tougher for sponsoring employers. In order to reclaim VAT, HMRC will require that the employer is a party to the contract and pays for the services provided without re-charging them to the pension scheme trustees.
This will be problematic for most UK pension schemes, where it is the scheme (or the trustees) itself that engages suppliers, not the employer. In particular, services provided in respect of a statutory appointment (for example scheme auditor or scheme actuary work) will necessarily be provided to scheme trustees. It is also not clear at this stage that the employer will be able to off-set invoices against any ongoing contributions.
It has been suggested a possible work-around may take the form of setting up a trustee company and then making this trustee company part of the same VAT group as the sponsoring employer. Such a move would require both company and trustee(s) to tread carefully, with specialist advice at all stages both in relation to the legal structure of the companies and the grounds and process for reclaiming VAT.
If indeed this does turn out to be the way to stop pension scheme costs leaping 20%, and sponsoring employers having to adjust to life without reclaiming VAT on pension costs, it could spell the end for the individually-named DB scheme trustee.
This blog post is intended as a commentary on recent HMRC announcements in relation to VAT on pension scheme services. It is not intended, and should not be construed as, advice to take action (or refrain from taking action) in relation to taxation matters. Trustees and sponsoring employers should seek specialist tax and legal advice before considering their VAT position in more detail.